Opinion: Carolina Journal Opinions

Folsoms Recount Government Business Disasters

• Burton Folsom and Anita Folsom, Uncle Sam Can’t Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy, Broadside Books, 2014, 239 pages, $26.99.

The day after the 2010 midterm elections, the federal government quietly announced the bankruptcy of Solyndra, a “green energy” company that had been touted by President Obama as a leader in the kind of innovation that would help the planet to “heal.”

Solyndra was founded by a big supporter of the president, and early in 2009 the company had received a $535 million loan from the government. In less than two years, the taxpayers were stuck with the loss.

Solyndra is a recent instance of the almost invariably foolish combination of government and business, but few Americans have any idea about our long history of such “partnerships.” As authors Burton and Anita Folsom show in this wonderful book, we have been making that mistake since our earliest days as a nation.

Throughout the book, the stories the Folsoms tell are fascinating but at the same time maddening, since they leave you thinking, “How could the politicians have been so stupid?”

Let’s start with the beaver pelts. George Washington had led the war for independence from Britain, but he nevertheless adhered to British mercantilist concepts, under which the government established and supported business enterprises for the supposed national good.

In 1795, with his backing, Congress passed an appropriation of $50,000 to create a number of trading posts in the Northwest Territories. The purpose was to counter British influence among the Indians by purchasing furs from them and selling goods to them.

There were private traders doing exactly that, but Washington and the Federalists who controlled Congress thought them inadequate for the national purpose. They were certain that the government must get involved.

Although these posts were expected to at least break even, they lost money and the subsidies had to be increased steadily.

In 1808, John Jacob Astor, a German immigrant, went into the trading business. With his own money at stake and possessing a much sharper mind for business than the government functionaries running the competing posts, Astor earned good profits.

The man in charge of the government’s operations, Thomas McKenney, turned to politics instead of figuring out how to compete against Astor. He wheedled more money from Congress, and also sought high licensing fees for all his competitors. He even tried to get Congress to ban his free market rivals. McKenney was the prototype of what the Folsoms call a “political entrepreneur” — eager to “win” through political influence rather than by doing a better job of satisfying consumers.

Finally, in 1822, Sen. Thomas Hart Benton managed to get a bill passed that ended the subsidies and closed the government posts, after 27 years of waste.

Another fascinating story the authors tell is that of our early steamship industry. Here, the central character is another famous business magnate, Cornelius Vanderbilt.

In his youth, Vanderbilt worked for Thomas Gibbons, who broke the Hudson River steamboat monopoly given to Robert Fulton by New York. Soon Vanderbilt was in business on his own, rapidly improving the steamboat, lowering fares, and improving customer service.

Vanderbilt was so successful that the cartel he competed against, the Hudson Steamboat Association, offered to buy him out for $100,000, provided that he would not run boats for 10 years. He took the deal, but it did the cartel little good. It raised prices after Vanderbilt left, but other entrepreneurs quickly entered the market and undercut its prices.

With the capital from the River Association, Vanderbilt went into the business of trans-Atlantic shipping. The British were already there, Parliament having given Samuel Cunard a large subsidy for passenger and mail service. Shortly thereafter, the U.S. government followed suit, subsidizing Edward Collins to compete with Cunard.

How could Vanderbilt survive against such subsidized and earlier-established rivals? By innovation and superior efficiency, that’s how.

When Vanderbilt’s lower fares put Collins into financial trouble, naturally he looked to politics for salvation. He pleaded for bigger subsidies and got them. But while Vanderbilt kept working to lower his costs, Collins squandered money building huge, luxurious ships that lost money in competition.

Economic sense finally prevailed when President Franklin Pierce vetoed the Collins subsidy in 1855. Vanderbilt continued to improve steamship travel and, amazingly, created the first canal across Central America so that ships wouldn’t have to sail around the tip of South America to reach California. That canal went across Nicaragua in 1854.

Why we had to wait until 1914 for the completion of the Panama Canal rather than benefiting from Vanderbilt’s canal completed 60 years earlier is a fascinating story, but you’ll have to read the book to find out about it.

Among the other illuminating stories about our failed governmental forays into business the book covers are the canals and railroads built in Michigan by its “boy governor” Stevens Mason, the subsidized waste and corruption of the transcontinental railroads built after the Civil War (with the notable exception of J.J. Hill’s sound and unsubsidized Great Northern), and the government’s support for Samuel Langley, who flopped in competition with the Wright brothers to build the first airplane.

Government should stick to its few proper tasks, which don’t include business operations. If you doubt that, you really must read this book.

George Leef is a contributor to Carolina Journal.